Despite the ban on short-sales – which has never worked in the past to do anything but instil fear in traders’ holding long positions – Italian banks are in free-fall following the utter failure of Draghi’s stress tests to encourage confidence in the European banking system.

INTESA, UBI, UNICREDIT, MONTE PASCHI SUSPENDED IN MILAN, LIMIT DOWN

Given the post-“whatever-it-takes” world of domestic sovereign bond-buying, it is no surprise that Italian govvie risk is jumping higher and the FTSEMIB is plunging.

“A relief rally would not be justified,” said Michael Woischneck, a portfolio manager at Lampe Asset Management in Dusseldorf, Germany. “There are still a lot of problems to fix, and Italian banks still have a lot of work to do. Even for the banks that passed, what is there to be relieved about? They still have to find a business model and figure out how to get unanswered questions that a stress test just cannot answer.”

The ongoing debacle of Italy’s Banca Monte dei Paschi (BMPS) took a turn for the worst today. The bank’s largest shareholders (MPS Foundation) approved (read – forced through) a delay in a EUR 3 billion capital raise, which the bank needs to avoid nationalization, until May. The delay (which will cost the bank EUR 120 million in interest) allows MPS more time to liquidate their 33.5% holding before their stake is massively diluted. Management is ‘considering’ resignation and is “very annoyed,” but the city Mayor is going Nationalist with his delay-supporting comments that “we cannot let the third biggest bank in this country fall prey to foreign interests.” So Europe is recovering but they can’t even raise a day’s worth of POMO to save the oldest bank in the world?

It appears, given news from Italy today, that European depositors are increasingly coming to the realization that deposits in their local bank are not ‘safe’ places to put their spare cash, but are in fact loans to extremely leveraged businesses. In a somewhat wishy-washy, ‘hide-the-truth’-like statement on Monte dei Paschi’s website, the CEO admits to, “the withdrawal of several billion in deposits.” Of course, the reasons why these depositors withdrew their capital from the oldest bank in the world will never be known though of course he blames it on “reputational damage” from their derivative cheating scandal. Apparently the fact that this happened to come about six week after said scandal and the bank’s third bailout, and that the prior two bailouts did not result in such an outflow of unsecured liabilities (at least not to the public’s knowledge), was lost on the senior management, as was lost that a far greater catalyst may have been the slightly more troubling events in Cyprus in the second half of March. Unsurprisingly, as Reuters notes, the CEO declined to give a forecast on the level of deposits at the end of the first quarter of 2013; no wonder given the bank just doubled its expectations for bad loans and the ‘Cypriot Solution’ dangling over uninsured depositor hordes.

Unfortunately for the apparently not quite big enough to not fail Italian bank’s former leaders, the Monte Paschi derivative debacle just won’t go away. As Reuters reports today, the first (or many) arrests have been made. Gianluca Baldassarri and four other people suspected of criminal conspiracy to commit fraud were arrested after police seized EUR40mm of apparently ill-gotten gains. The alleged fraud and bribery case charges Baldassarri (who left shortly after the arrival of the new CEO in Jan 2012) of misleading regulators over the true nature of a secret derivative contract that was found in a safe by the bank’s new management in October 2012. Echoing JPM’s London Whale, they uncovered a ‘systematic overshooting of risk limits’ in the management of the group’s EUR24bn prop book. Baldassarri was arrested quickly after the police found evidence that he was trying to cash in securities worth over EUR1mm soon after the funds were seized. Continue reading »

Italy’s Monte dei Paschi said there were no more derivatives losses beyond the 730 million euros ($988 million) it has disclosed, which have rattled financial markets and become a campaign issue ahead of parliamentary elections.

The derivative trades are at the heart of a fraud probe into former management of the world’s oldest bank, raising doubts about the effectiveness of banking supervisors, including European Central Bank chief Mario Draghi, who was Bank of Italy governor from 2006 to 2011, and the role of politicians, who agreed a state bailout for the lender.

Later on Thursday at an ECB news conference, Draghi is likely to be asked how much he knew of the trades.